How are SIP returns in your funds lower than lump sum returns

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Many investors have recently stumbled upon a strange phenomenon. Their SIP return is lower than lump sum return in the same fund and for the same time period. This is quite a shock for them, as investors have always been sold the idea of SIPs being better than lump sum investments.

This especially is advertised to a great extent, and one of the big advantages of SIP, advocates say, is that it does rupee-cost averaging. So, in short, a SIP allows you buy units regularly in bear and bull markets. As a result, your average cost per MF is low. So, naturally, the returns are better. But this popular theory has not proved right recently as SIP investments over the last one year have delivered a much poor returns than lump sums invested a year ago. So, what’s happening here? Relax. RupeeIQ breaks it down for you.

SIP-ping not working?

Recent data doesn’t seem to support SIP as a better strategy than lump sum. There are a large number of funds where SIP strategy has not done better than lump sum. Let’s look at some specific examples. Please bear in mind these examples are only for representational purpose. We have typically taken the example of the most popular funds. There is no other reason for highlighting these funds.

Aditya Birla Sun Life Frontline Equity Fund is the largest actively managed large cap fund in Indian MF industry. In last one year ended November 6, lump sum investments in this mammoth fund have faced 4.8% loss. But its SIP investors in the last one year have faced a greater loss of 7.8% That’s a 300 basis point lower return for SIP heroes.

Next, let us look at a multicap fund. Kotak Standard Multicap Fund, the erstwhile Kotak Select Focus, is the biggest multicap product in MF mart. In last one year, lump sum investments in this scheme would have led to a loss of 3.2% but SIP investors have lost 6.5%. So essentially SIP investors are dealing with almost double the loss compared to lump sum investors.

In the midcap space, HDFC Mid-Cap Opportunities Fund is the big daddy. Any investor who invested money as lump sum in this fund one year ago has seen 10.5% erosion of original investment. But, the patient SIP investor has seen a 20% loss in the same fund for the same one year.

We can cite many other examples, but typically 80-95% funds across categories are seeing this strange trend: SIP returns are lower than lump sum returns for the same time period. You can look at 3-year and 5-year periods also, and this trend holds.

Decoding the phenomenon

So does all this mean that SIPs, which were sold to investors as a reliable way to navigate volatility, are likely a scam? No, not really.

SIPs will always beat lump sum strategy if the market falls in a straight line. But that didn’t happen in the last one year. It has been highly volatile. This means markets have followed an up then down then up, think of it like a zigzag. If markets had fallen headlong and kept on declining without any recovery in between, your SIPs would have done much better. This is because your SIP average cost of MF unit would be lower than the average cost of MF unit via the lump sum route. Since markets did not fall like a straight line, the much-touted averaging feature of SIPs has not worked as well as we would have liked.

But, there is no need to worry about long-term investors. Markets are by nature unpredictable. So, we don’t know when and in which way markets will fall. Over the long-term periods, we have seen SIPs deliver great returns. The bigger purpose of doing a SIP is that it virtually cuts out the chance of your losses once your SIP is five-year old. The probability of making losses is high when the SIP is one or three year old, but as the age goes up, the chances of loss start dropping to virtually zero. In fact, SIPs have seldom made losses if held for five years.

SIP is not only a strategy for optimal return. It is more of a convenient tool. For most MF investors, SIPs are a more realistic option. This is because it brings a disciplined approach to investing from your monthly income, and removes the need to do market tracking or timing. It is easy to invest Rs 10 lakh over 120 months for most people compared to invest Rs 10 lakh at one go.

Investors should focus on the savings needed to reach their financial goal. Periodic lump sum investments in down markets, in addition to regular SIPs, is a very good strategy to take the best of both worlds.